AgDM Special Feature newsletter article, December 1997

Options for backgrounded calves

Tim Eggersby Tim Eggers, Extension Farm Management Specialist, 712.542.5171, teggers@iastate.edu

Calves being backgrounded have a certain fate.  They will be finished somewhere and somehow.  You should keep that in mind when you look at your options when backgrounding is completed.  However, you should be proactive and examine those options now -- evaluate them for appropriate actions.

There are many reasons for backgrounding cattle.  Perhaps you do it because you have always done it.  Some do if for income tax management reasons or to manage cash flow.  Yet others do it as part of a well defined business management plan that fits their abilities and the resources of the operation.  Regardless of the reason, you should evaluate the opportunities presented by the market each year.  Use the example in Table 1 to analyze your options.  Enter your own figures.  Options for calves currently in a backgrounding program include:

Table 1.  Expected Returns to Finishing Backgrounded Cattle (per head)

 

Steer

Heifer

Purchase date

Jan. 1

Jan. 1

Purchase wt. (lbs)

750

700

Days on feed

156

136

Expected sale date

June 6

May 17

Finished wt. (lbs)

1,250

1,050

 

 

 

Feeder Cost

 

 

Feeder price

$80

$77

Feeder cost

$600

$539

 

 

 

Feed Costs

 

 

Corn (bu.)

63

47

@ $2.40

$151.20

$112.80

Alfalfa-brome (ton)

.35

.25

@ $100

$35.00

$25.00

Supplement (lbs)

117

102

@ $.08)

$9.36

$8.16

Total feed costs

$195.56

$145.96

 

 

 

Other Costs

 

 

Vet., Med. & Oper.

$13.80

$12.75

Interest / feeder (10%)

25.64

20.08

feed & oper. (10%)

4.47

2.96

Labor ($7.00)

14.00

14.00

Death loss (.75%)

4.50

4.04

Trans. & marketing

10.80

9.80

Total other costs

$73.32

$60.13

 

 

 

Total variable costs

$868.78

$745.09

 

 

 

Fixed facility costs

14.20

12.30

Total all costs

$882.98

$757.39

 

 

 

Selling price per cwt. to

 

 

cover var. costs

$69.50

70.96

cover all costs

70.64

72.13

 

 

 

Returns

 

 

June fut. (mid-Nov.)

$70.35

$70.35

Est. Basis *

.13

1.31

Hedge price

$70.48

$71.66

 

 

 

Returns per head

 

 

Return / var. costs

12.25

7.35

Return / all costs

-2.00

-4.94

* Decision File Live Cattle Basis

Corn price

Corn price, which makes up 15 percent of the cost for heifers and 17 percent for steers, is expected to have at least the normal 30 cent rise from harvest levels. Currently (Nov. 20) cash corn prices range from $2.40 in Northwest Iowa to $2.69 in Southeast Iowa.  The expected returns to finishing backgrounded cattle (Table 1) start to go negative at around $2.58.  We are already above that price level in parts of Iowa.  This indicates that, if finishing backgrounded cattle is preferred, corn needs should be locked in at a favorable price.

Cattle price

Cattle prices have some upside potential.  If protecting current profit levels is a concern, then both needs could be met by purchasing put options or by using synhetic puts.  Two Ag Decision Maker Decision Files can help you make these decisions -- Forward Pricing of Livestock and Live Cattle Basis.

Conclusion

Cattle currently being backgrounded will be finished somewhere.  It is up to you to decide where and how.  Opportunities exist with retained ownership -- either in your feedlot or in a custom feedlot.  However, these alternatives need to be examined closely to identify the best option.

 

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